The trouble with bonuses

9th September 2019

Over lunch with the Financial Times, John McDonnell fired a warning shot over bankers’ “grotesque” bonuses this weekend, pledging a consultation on ways to limit the size of payouts.

“It’s become part of the [City] culture and it is so separate and distinct and isolated from the rest of the real-world economy and that’s why people are offended by it,” said the Shadow Chancellor, who is looking at options ranging from increasing shareholder power over remuneration to absolute restrictions on the size of bonuses.

Predictably, a Greek chorus of condemnation has struck up, with assorted conservative commentators condemning Labour for driving “wealth creators” out of the country. And certain newspapers defaulted to the logical extreme with headlines saying Labour would “ban” all bonuses.

This is a sensitive subject in the Square Mile but it isn’t one that Labour can shy away from. It’s central to the question of financial reform, and to whether we have truly learned lessons from the global crisis of 2008.

Defenders of the financial industry’s system of remuneration will tell us that we shouldn’t really call them bonuses – just variable pay or profit-sharing mechanisms. And that sizeable payouts are essential in creating incentives.

But it’s well documented that excessive bonuses encourage risk-taking behaviour – in his review of the global banking crisis, Adair Turner, Chairman of the Financial Services Authority, acknowledged that “inappropriate incentive structures played a role in encouraging behaviour which contributed to the financial crisis”, a view shared by the US Financial Crisis Inquiry Commission.

It’s a pretty recent phenomenon, too. The value of all bonuses in Britain was £46.4bn in 2017. Within the financial and insurance industries, the average per employee has shot up by 93.8% since 2001 according to the ONS.

The New York State Comptroller publishes a handy totting-up each year of Wall Street’s bonus pool, which is a useful barometer for the health of payouts generally. In 2018, the average was $153,700, the previous year it was $184,400. Not quite up to the record of $191,400 just before the financial crisis – but close.

Scroll back a couple of decades though, and the picture was dramatically different. In 1990, the typical bonus was just $15,500. Presumably people worked hard back then, too.

Nobody is saying that financiers shouldn’t be rewarded for success. A core part of Labour’s platform is for employees to have a stake in the success of any business – hence the party’s plan for distribution of up to 10% of companies’ shares to workers.

Our society, though, is among the most unequal in Europe, according to the OECD, and millions have been feeling the pinch from stagnating living standards or public sector austerity.

It is quite right that an incoming Labour government should scrutinize whether the financial sector is truly valuing talent in a fair and transparent fashion; whether pay structures are incentivising short-term wins or long-term success, and whether the spoils of success are being distributed to all stakeholders, or just a few.